Anatomy of an Oil Discovery

by Dave Cohen

The discovery has been praised by Chinese Premier Wen Jiabao.... "The discovery of the high-quality (Jidong) Nanbao oil field is the most exciting one in more than 40 years," Wen was quoted as saying during a visit to the field on May 1. "I was so happy on hearing the news that I couldn't even fall asleep."

On March 27th, Rigzone reported a new oil discovery by Petrochina in Bohai Bay. The Nanpu block of the Jidong field was said to hold 2.2 billion barrels of oil, supporting a flow of 200 thousand barrels of day within three years. On May 3rd, PetroChina announced that the earlier number was far too low. The new estimate stated that the field contained 7.35 billion barrels (1.02 million tons) of oil equivalent. But this was not all: the Bohai Bay rim could have geological structures holding 146 billion barrels! Informed evaluations of oil finds are useful in judging whether the world is facing a near-term peak in production. The Jidong discovery provides a window on the world's oil future.

Note — Reserves and production flow estimates will be stated in barrels using the standard conversion 7.3 barrels per metric ton (mt).

News of the Jidong discovery sent PetroChina share prices up to $10.16 (Hong Kong), a rise of 14%. Their stock was in need of a boost. PetroChina's Luster Fades on Concern Over Its Rising Costs (Wall Street Journal, March 9, 2007) documents investor concerns over falling output at Daqing and production cost inflation. The bloom came off the rose quickly, however, as investors decided they had may have overreacted to news of the discovery.

But other analysts say there are some questions about how costly the field will be to develop and how big it really is when held up to much tougher U.S. standards, which take into account how much oil in a field can actually be produced. PetroChina, which has American depositary receipts traded on the New York Stock Exchange, hasn't yet booked its reserves with the U.S. Securities and Exchange Commission on this new find.

"With meaningful volumes of oil not coming online for several years, reserve estimates at this phase not being official, and stock-price estimates having near and midterm reserve replacement built in, we believe the reaction in markets was somewhat overdone," says Bradley Way, a Beijing-based analyst with BNP Paribas.

PetroChina's stock fell to HK$9.94 on May 9th.

The Jidong field is in Hebei Province near the city of Tangshan. The reservoir straddles the shallow water bay's shoreline, as shown in the graphic (left, source Anadarko). Bohai Bay has long been a prolific oil  producing region, and contains the Shengli oil field, China's 2nd largest after Daqing. Shengli, which was discovered in 1961 and developed in 1965, may have been the oil find Premier Wen was referring to.

There is no way to know how PetroChina calculated its reserves and flow numbers because this is not public information. Four data points are known: the discovery covers an area of 1,300-1,500 square kilometers, vertical well test had flows between 584 and 730 barrels per day, horizontal wells demonstrated flows between 1460 and 3650 barrels per day, and the average thickness of the four oil-bearing reservoir layers is 80-100 meters (262.5-328 ft) per well. The reservoir geology is unknown.

Platts reports on the PetroChina discovery on May 10th.

CNPC's publicly-listed business arm PetroChina last Friday said its discovery of the Jidong Nanpu oil field in the shallow waters of the Bohai Bay has a total of four oil-bearing structures. It has confirmed geological reserves of 1.02 billion mt (7.35 billion barrels) of oil equivalent, including 905.6 million mt (6.62 billion barrels) of crude reserves and 140.1 billion cubic meters (4.95 Tcf) of gas.

PetroChina intends to start developing the Jidong Nanpu oilfield as soon as possible. The first-phase of the project, to be finished by 2012, will produce 10 million mt/year (200,274 b/d). Output is expected to rise progressively to 25 million mt/year (500,000 b/d), making the oilfield China's third largest after Daqing and Shengli.

Let's decipher PetroChina's numbers. In Chinese reserves accounting as described by the SPE Oil & Gas Reserves Committee, "geological reserves" refer to the discovered oil in-place (OIP). Moreover, only 2.956 billion barrels (405 mt) were described by PetroChina as proved reserves. The probable reserves consist of 2.175 billion barrels (298 mt) and the possible reserves consist of 1.475 billion barrels (202 mt). The SPE committee notes (p. 11) that under the Chinese classification system (p. 17), "the term 'reserves' is used for both discovered in-place volumes and technically recoverable (EUR) volumes in addition to economically recoverable volumes." Professor Han Xuegong of the Chinese National Petroleum Corporation (CNPC, parent of PetroChina) Manager's Training Institute in Beijing disambiguates reserves numbers —

Han added that based on a primary recovery rate of 40% for oil fields in general, Jidong Nanpu's overall output would be about 408 million mt of oil equivalent if no further discoveries are made in the acreage [from Platts, op cit]

A recovery factor (rate) is the ratio of reserves divided by the oil in-place — it is impossible to recover all of the oil and gas in a reservoir. Han's conjecture that 40% of Jidong's geological reserves will be ultimately recovered means that PetroChina's proved, probable and possible reserve numbers refer, in the Chinese methodology, to measured, indicated and inferred oil in-place volumes, respectively. These are not estimates of technically or economically recoverable oil reserves assigned at three standard levels of probability.

Estimates of PetroChina's recoverable reserves at Jidong can be used to pin down future peak production flows. In Early new field production estimation could assist in quantifying supply trends (Oil & Gas Journal, May, 2006), Rafael Sandrea provides a model for making "early estimates" of production potential for new oil fields. The model uses the logistic equation (1) below, where Q is the cumulative oil production, dQ/dt is the annual production rate, K is the recoverable reserves and r₀ is the initial production growth rate.

           (1) dQ/dt = r₀ Q (1 - Q/K)

The model is based on the assumption that a field's peak production occurs when its recoverable reserves are 50% depleted. K is established by using the volumetric estimate derived from exploratory test wells. A correlation between r₀ and K is accomplished by using a decline analysis to calculate the values for these parameters from a database of eight sample fields. The resulting model equation is shown in the graph (above left). The output q_max is expressed in thousands of barrels per day (b/d), and K denotes billions of barrels. After Sandrea establishes the model's reliability for his sample, he applies the equation to 18 new fields producing in a variety of geological settings. The model overestimates published values by 17.5% on average. This is a positive result due to the fact that field operators routinely set these values at 10-15% below the peak production potential to "maintain a plateau-like production level over a prolonged period in order to optimize the investment."

Sandrea's model can be applied to the Jidong discovery. The recoverable reserves K may established by using a recovery factor of 35%, the global average. For proved recoverable reserves of 1.034 billion barrels, the equation yields an estimate of 293 thousand b/d. Adding in all of the probable reserves (1.796 billion barrels), the result is 411 thousand b/d. Since the model overestimates peak output, and assuming PetroChina optimizes their oil production levels, these estimates may be anywhere from 2.5% to 7% higher than the realized maximum production flows in the average case.

Platts indicates that PetroChina expects Jidong Phase 1 to achieve 200 thousand b/d in 2012, with subsequent production topping out at 500 thousand b/d. Sandrea's model predicts that the latter number is much too high. Some of the possible reserves may eventually be added in, or the ultimate recovery factor may be greater than 35%, but neither possibility is likely to affect the peak production potential at Jidong.

The EIA estimates that China's February, 2007, oil production was 3.739 million b/d. In 2006, China’s oil consumption rose to about 7.4 million barrels per day (first graphic, left). Daqing's output peaked in 1997 at 1.1 million b/d. The field's production is expected to decline to approximately 0.8 million b/d in 2010. Annual demand growth remains strong. Jidong Phase 1 (onstream in 2012) will provide only 2.7% of China's current consumption. As modeled here, production may reach 400 thousand b/d sometime thereafter — 2015 is a fair guess. With demand growing, and Daqing declining, Jidong will have little or no effect on China's rising oil imports. It is unlikely that Jidong will ever provide 2.7% of China's total consumption.

 

Bohai Bay is a mature oil province. Chevron, Kerr McGee (now Anadarko, first graphic) have carried out successful E&P there in recent years. Still, it is hard to believe that a field containing 7.35 billion barrels of oil equivalent (1.02 mt) was somehow overlooked. The discoveries trend (graphic, left) shows just how rare such finds are in recent decades. Granting this possibility, it strains credulity — to say the least — that the total unexploited resources in place are in the 140+ billion barrel range. China has floated this rumor periodically in the past. From a December, 2004, China Daily report —

Exploration teams have found the Bohai Bay Basin of North China may contain 20.5 billion tons (149 billion barrels) of offshore oil reserves, with 9 billion tons already proven, experts said. The remaining 11.5 billion tons need to be further explored.

It is impossible to be precise about Jidong's oil production potential at this early stage of the game. Using a correct interpretation of PetroChina's reserves numbers, Sandrea's production model provides ballpark estimates that moderate the hyperbole accompanying the Jidong discovery. Think of it this way: suppose you are doing your laundry and you find a $20 bill in your pants pocket. Even if you are thousands of dollars in debt, how would this lucky find make you feel? At that moment, you would feel good!